Equity Investments - Equity Investments Section 2

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11. Which of the following types of securities of a same company would most likely offer the lowest expected return to the investor?

  • Option : B
  • Explanation : Putable preference shares are less risky than their callable counterparts. They give the investor the option to put the shares back to the company. Because of the lower risk they will provide a lower expected rate of return. Common shares are the most risky, whether or not they are dividend paying, and are likely to offer the highest expected return.
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14. Which of the following equity securities is least risky from an investor’s point of view?

  • Option : B
  • Explanation : Putable preference shares are least risky as they give the investor an option to sell the shares back to the issuer at a pre-determined price. This pre-determined price creates a floor for the share’s price that reduces the uncertainty of future cash flow of investors.
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15. Which of the following is most likely to be an advantage of a convertible preference share?

  • Option : C
  • Explanation : Convertible preference shares tend to exhibit less price volatility than the underlying common shares because the dividend payments are known and more stable.
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